The most immediate catalyst was the fact that I recently saw reference to a book from 2007 titled Saving American Manufacturing by Mike Collins. More on that later. That, in turn, led to a series of mental hyperlinks to a variety of somewhat conflicting inputs on this issue, which is highly contentious.

A few years ago, at the Georgia Tech Supply Chain Executive forum, Dr. John Langley broke us into small groups to discuss several topics, one of which was the rising costs of fuel and logistics and whether that might lead to some reversal of the offshore movement.

The general consensus of my table was that there would likely be some impact in terms of “nearshoring” or decisions not to pursue offshore manufacturing strategies, at least on the margin. Then Darryl Pavelka, EVP of Global Supply Chain for Payless Shoes, added a sobering perspective.

Gilmore Says:

"What other manufacturing sectors are at, or near, similar levels of less-than-sustainable critical mass for domestic manufacturing? What do you say?

“The shoe manufacturing infrastructure in the United States is gone,” he said (paraphrasing from memory). “It doesn’t matter how high oil prices go. You can’t bring it back.” The machinery, supply base, and manufacturing expertise simply no longer exist here. The cost to re-create it would simply overwhelm even sky-high global logistics costs, and no one company could even think about it alone, even a giant like Payless.

Ironically, a year or so later, the Wall Street Journal ran a story about one ex-executive of a large shoe company who launched an entrepreneurial effort to build a new niche manufacturer of high-end footwear that would be made in Florida. The effort ultimately failed - in part because it could not source many components, such as eyelets, domestically. Technicians couldn’t be found to repair some production machines when they broke down. Who would train to fix shoe machinery in the US?

Which, of course, leads to a question I rarely hear asked or answered: what other manufacturing sectors are at, or near, similar levels of less-than-sustainable critical mass for domestic manufacturing?

The researchers at Global Insight made a big stir last August when they predicted that China would overtake the US as the world’s largest manufacturer as early as this year, 2009. The National Association of Manufacturers (NAM) quickly shot back saying it disagreed with the numbers. According to its data (based in part on World Bank numbers), in 2008, the US still accounted for roughly 25% of total global production, double that of China, and that it would be after 2020, at the earliest, that China would pass the US.

NAM and others rightly note that contrary to the perceptions of many, US manufacturing growth has actually been reasonably robust for many years. For example, overall manufacturing output seems to be rising about 2% per year (prior to the recession of course), even in the face of rampant offshoring.

Many ask how this could be. Business Week two years go attributed it in part to “phantom GDP” – in which accounting practices in the US government looking at import prices wind up overstating US company “value add” and, hence, actual domestic production.

Clearly, US manufacturing employment continues to shrink dramatically, and is now less than 10% of the total US workforce, down from 30% in 1950. Some say the issue is far more of automation and productivity gains than outsourcing (see Automation, Not Offshoring, Real Source of Manufacturing Job Loss); others say that understates the impact of offshoring.

There is also no question that in the US and most of Europe, manufacturing continues to shrink as a percentage of the overall economy – and that this has been occurring since the 1950s. In fact, when charted, the decline in that percentage, down now to about 11% of US GDP, does not look any particularly steeper over the last decade than it did in the 1960s. Again perhaps surprising to many, manufacturing represented only about 25% of US GDP in 1966. In fact, the countries that have the highest percentage of their GDP coming from manufacturing are not exactly economic juggernauts (e.g., Cuba, Turkmenistan).

Which reminds me of a quote from business author Jim Gilmore (no relation): “The entire history of economic progress involves paying someone to do something for you that you used to do yourself.”

If you think about it, that is clearly true. Did your Dad spend a lot of time repairing cars when you were growing up? When was the last time you replaced the brakes yourself? (Hats off to those who can actually still do it.) So, at a macro economic level, we have been doing just the same thing for the last 50 years, paying others to make things for us as our affluence has grown.

But there are concerns. Just picking on one, I think there are real and under-explored national security concerns. Would we really want to lose our steel production capabilities, as just one example? I wouldn’t think so. Ditto for many others. Do we want no Intel computer chips made in the US?

In his book, Mike Collins offers a litany of reasons why US manufacturing should be saved. Just highlighting a few: manufacturing drives most R&D, which, long term, is key to competitiveness; manufacturing offers more broad-based employment opportunities than many of the service sectors, in which only the “highly credentialed” can really thrive; the decline in manufacturing is directly related to the relative decline in standard of living for the middle class.

I also don’t see how any country can really support on-going, dramatic trade deficits, which are largely manufacturing driven even when you take out oil. China has trillions now in foreign currency reserves.

It turns out that Collins' recommendations are more focused on what specific companies can do, especially medium- and small-sized manufacturers, than big-picture policy recommendations. Get lean, get focused, really understand your costs, price smartly, cut out overhead, etc. All good ideas, but Collins basically says the large manufacturers are just going to do what they want, which is mostly go offshore. The problem is that many of the small- and medium-size manufacturers depend on the large ones for their business.

At the CSCMP Toronto Roundtable yesterday, I had the chance to co-present with George Stalk, a well-known business strategy guru from Boston Consulting Group. In the limited time he had available, Stalk made a good case that for many manufacturers – those with high gross margin products and highly variable demand – domestic manufacturing could, in fact, be strategically “advantaged” over the offshore option, if you constructed your supply chain right to leverage information and reduce cycle times dramatically. This, in fact, is exactly what apparel retailer Zara is doing in Europe with great success, while in the US two decades ago, “Quick Response” couldn’t deliver.

I will report on this in more detail later.

NAM also argues that US manufacturers are burdened with too high tax rates and health care costs, and that if adjustments in policies were made, more goods might be made here as well.

Others have noted the potential impact of fuel and logistics costs on offshoring, and Dr. David Simchi-Levi of MIT actually put some numbers to it, and showed, at some levels, the economics did work in favor of domestic production. Then oil prices crashed, and those pressured dissipated – for now. It will be back.

Stalk also observed that companies often underestimate the costs of inventory and obsolescence and lost sales from out-of-stocks resulting from long, offshored supply chains. Hence, why companies often seem disappointed in the total bottom-line results from offshore strategies.

I am out of space, and haven’t answered the question. Would love to hear your views?

Do you think US/Western manufacturing should be saved? At what level? How can that happen? Will it take protectionism? Let us know your thoughts at the Feedback button below.

Wall Street finished last week with overall moderate gains. Our Supply Chain and Logistics stock index had mixed results. In the software group, Logility soared an amazing 35.3% as American Software, Inc. offered to buy all the remaining Logility shares (approximately 22%) that it does not currently own. In the hardware group, both Intermec and Zebra was up (2.5% and 9.2%, respectively). In the transportation and logistics group, CNI climbed 5.9% despite a fall of 25.8% in freight for the week ending 9 May. Also within the group, but on the negative side of the equation, Yellow Roadway fell another 13.5%.

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You’ll also find letters on sharing supply chain knowledge across the enterprise, the rise of the ocean megaships, and something one reader felt should be added to a recent IBM report on issues important to supply chain executives.

Feedback of the Week: On Integrated Planning and Execution:

I think this is good research, but I think it falls short of providing groundbreaking insights into the subject of S&OP - the strive to integrate planning & execution has always been there. Any research after a decade of striving to excel in S&OP should at least highlight two other important root causes of S&OP failure - 1) Absence of a formal organizational structure to drive S&OP process by aligning all the stakeholder, and 2) Siloed performance metrics that further drive the misalignment between the stakeholders. The former requires a dedicated team - almost like an S&OP function, just like Sales Function, Marketing Function, etc, to orchestrate S&OP process between all stakeholders.

The latter requires a big change in the performance metrics - for example, sales team being made accountable for the inventory cost as well, in addition to their usual revenue numbers - this can drive a more collaborative behavior. And yes, I have seen these being successfully deployed.

On a more futuristic note, I see an important piece missing and that is - financial implications analysis. This requires every S&OP decision to be based on financial implications understanding, using what-if analysis and not just pure quantity level match. For example, trying to balance demand and supply of a given item that's in short supply by substituting it with another item (using demand shaping techniques) that's a premium product - for example, the legendary Dell example of substituting a 17" monitor for 15" monitor at a price of 15" monitor - should NOT be just based on availability of the second item. One should also analyze the price discounts required to push the second item and, hence, answer questions like - When is it profitable to substitute a low-end product (due to stock out) with a high-end product at lower price?

If the probability of demand for the second item is high, then you would not want to discount it for meeting the demand for the first item. These decisions, of course, are based on strong mathematical analysis and require the availability of data - price, cost, demand probability, etc.

In my previous company BOC Group Limited (now part of the Linde Group), I worked for 7 years in the UK before spending 4 years as the Regional Supply Chain Planning Manager for Asia, officially covering 11 countries.

The structure was a great initiative to develop an Asian Region management team blended with experience from Asian and non-Asian managers from the UK, Australia and South Africa. At the beginning, we were a bit “thrown in at the deep end” using our contacts and investigation/research skills to transfer best practice that we had experienced in our home geographies.

Then BOC assigned Global Managers for different functions, e.g., Global Supply Chain Manager to a Global Best Operating Practice (BOP) team and started Global Peer Group Meetings where representatives from different continents/functions in the world would meet twice a year to define objectives and strategies, share best practices in terms of technology, structure, processes, etc., prioritize work for the BOP team and form a global network of contacts. This was a great way to work together towards one set of goals and strategies, break down the barriers between the geographies and to share the learning, best practices and development work! And then repeat the implementations across the businesses/globe.

Sam Daysh

Directora de Mejoramiento de los Procesos

Argos

On Economies of New Megaships:

It all depends on the economies of scale impacted by destination fill, for lack of a better word. If the megaship is fully loaded at source and completely offloaded at destination, the cost per container should be lower by applying basic logical and logistical principles. If you need to start doing extensive deck planning per destination, thereby causing honeycombing and reducing capacity efficiency, it would become a much more intricate debate.

From an environmental impact base, I would rather see fewer but larger modern maintained ships spewing pollutants into the oceans than a large fleet of smaller ageing vessels, even if this causes a slight increase in end-to-end shipping times.

Gerrit Fourie
Senior Consultant
Ovations Group

On Supply Chain Executive Issues:

One more factor which is going to have a significant impact on supply chain is Terrorism. Many Asian countries are manufacturing goods for all the multi-national companies based in USA and Europe.

The same Asian countries economy is getting distributed by terrorism, like for example: 1. Recent attacks in Mumbai 2. Attacks on cricket team in Lahore.

So terrorist attacks needs to be factored in supply chain planning and design phases.

Rameshbabu PV

Senior Consultant

Enterprise Solutions

SUPPLY CHAIN TRIVIA

Q.
What percent of total manufactured goods consumed by businesses and consumers in the US is imported?

A. 27% in 2007, the latest year for which statistics are available from the US Bureau of Economic Analysis. It seems likely that number rose in 2008. 2009 remains unclear, as imports are down far more than the overall economy.